In addition to preparing tax returns, practitioners may provide additional related services, such as tax planning. Practitioners who engage in tax planning and provide tax advice must keep these rules in mind.
Tax Planning - Tax planning to reduce tax liability is a legitimate goal. However, if the planning includes an element of fraud, deceit, or concealment, it becomes tax evasion. Practitioners who engage in tax planning should keep the following references in mind.
• IRC §7201 relating to tax evasion
• IRC §7206 relating to false returns, concealment, and other prohibited conduct
• Requirements for written advice under Circular 230, §10.37
Tax Evasion - IRC §7201 states that any person who willfully attempts to evade any tax imposed by the Code (including evasion of tax payments assessed under the Code) is subject to felony conviction. Upon conviction, IRC §7201 provides a fine of up to $100,000 ($500,000 for a corporation), or five years’ imprisonment, or both (along with the costs of prosecution). Moreover, under the same Code section, a fine of up to $250,000 may be imposed for tax evasion.
Read more (including some specific examples of tax avoidance vs tax evasion).
“What if” scenarios are good for thinking about and practicing personal and professional ethics. Here’s one that CPE Link instructor, Art Berkowitz, CPA likes to use.
As part of your accounting services, you provide limited financial planning services to your clients. One of you new clients (a middle-aged married) asks you to review their portfolio and make recommendations for investing an additional $100,000 they have in cash. In reviewing their portfolio you note the following:
- The client is adequately diversified for their age between fixed income and equities
- Approximately 35% of the equity portion of the portfolio is in one investment with a private money manager
- The securities with this manager have outperformed all the other investments by 3 to 4 percent per year
- The client tells you that this money manager waived his $1M minimum and accepted their investment of $250,000 because several friends invested at the same time.
- The money manager has a track record of over 25 years of beating the S&P 500.
You check out the money manager and find that he does indeed have a long-term track record and is considered something of guru on Wall Street.
What recommendations would you make about
- The 35% invested with the money manager
- The $100,000 in cash your client would like to invest
Bernie Madoff—the money manager in question—has, by this time, served a little over 2 years of his 150-year prison sentence for fraud. But, remember, in this scenario, that hasn’t happened yet. Without the wisdom of hindsight, what would you, or should you, do?